QUALCOMM Incorporated — Q1 Fiscal 2023 Form 10-Q
Reporting period: Three months ended December 25, 2022; comparative quarter ended December 26, 2021. Unaudited interim results.
Business context and results
Qualcomm earns revenue principally from semiconductor products and services through QCT and patent licensing through QTL; QSI makes strategic investments. Management attributed weaker results mainly to macroeconomic pressure on device demand and customers reducing elevated inventories.
| Metric | Q1 FY2023 | Prior-year quarter |
|---|---|---|
| Revenue | $9.463 billion | $10.705 billion |
| Operating income | $2.465 billion | $3.864 billion |
| Net income | $2.235 billion | $3.399 billion |
| Diluted EPS | $1.98 | $2.98 |
| Gross margin | 57% | 60% |
| Operating cash flow | $3.095 billion | $2.057 billion |
| Capital expenditures | $398 million | $583 million |
Financial position and segment performance
- Revenue declined 12% year over year. Equipment and services revenue was $7.784 billion, down $898 million; licensing revenue was $1.679 billion, down $344 million.
- QCT revenue fell 11% to $7.892 billion and segment EBT fell to $2.183 billion from $3.114 billion. Handsets declined to $5.754 billion from $6.989 billion; automotive rose to $456 million from $288 million and IoT to $1.682 billion from $1.570 billion. QCT EBT margin was 28%, down from 35%.
- QTL revenue decreased 16% to $1.524 billion and EBT was $1.117 billion, versus $1.818 billion and $1.406 billion, respectively. QSI recorded an $8 million EBT loss versus $122 million in earnings.
- Cash and cash equivalents were $4.808 billion and marketable securities $3.430 billion at quarter-end, totaling $8.238 billion, excluding cash classified as held for sale. Inventory was $6.932 billion, up from $6.341 billion at September 25, 2022.
- Reported short- and long-term debt totaled $16.877 billion; aggregate debt principal was $17.332 billion. No commercial paper or revolving-credit-facility borrowings were outstanding at quarter-end. Current assets were $21.098 billion and current liabilities $10.081 billion.
- Financing cash outflows included $1.270 billion for share repurchases and $842 million in dividends. The company issued $1.9 billion of notes, including 5.40% notes due 2033 and 6.00% notes due 2053.
Material changes, outlook, and notable items
- Management expected macroeconomic weakness and customer inventory drawdowns to continue for the next several quarters, negatively affecting revenue, results, and cash flows; elevated customer inventories could take a couple of quarters to resolve. Qualcomm also expected elevated inventory of its own and warned of possible excess or obsolete inventory charges.
- The company expected further price increases from certain key wafer suppliers, continued 5G deployments and device launches, and intense competition, particularly in China. It provided no specific consolidated revenue or earnings guidance in the supplied filing text.
- Q1 included $80 million of restructuring charges, mainly severance. Following additional cost-reduction actions, Qualcomm expected approximately $80 million of additional restructuring charges in Q2 FY2023.
- Federal tax rules now require capitalization and amortization of R&D expenses. Qualcomm estimated approximately $1.0 billion of additional cash tax impact for FY2023, while estimating a 9% annual effective tax rate. The quarter’s 4% effective rate included $150 million of net discrete tax benefits.
- Net discontinued-operations losses were $38 million, related to Veoneer’s Non-Arriver businesses held for sale. Qualcomm expected the sales of those businesses to be completed during FY2023, subject to approvals and other conditions.
- Two customers/licensees each represented at least 10% of quarterly revenue: one 34% and another 14%. The filing identifies them only by anonymized labels in the concentration table.
- Legal and regulatory exposures include the Arm dispute over Nuvia-related licensing, antitrust and consumer class actions, and regulatory matters in Korea and Europe. Qualcomm said it had not accrued losses for these matters other than the previously recorded EC fine; possible losses for other matters were not reasonably estimable. An adverse outcome could materially affect the business.
- Management stated that available liquidity, expected operating cash flow, and financing activities should meet working and other capital requirements for at least the next 12 months. The filing also highlights customer concentration, customer vertical integration, China and trade-policy exposure, semiconductor cyclicality, supply constraints, competition, licensing challenges, and legal, cybersecurity, and debt risks.
Important facts for investors to verify
- Whether handset demand and customer inventory normalization recover as management anticipated, and how that affects QCT revenue, margins, and inventory reserves.
- Whether growth in automotive and IoT can offset continued handset weakness; track QCT segment EBT and supplier cost increases.
- How the $1.0 billion estimated FY2023 cash-tax impact affects operating cash flow and capital returns.
- Progress and final outcomes in the Arm, antitrust, licensing, and regulatory matters, including potential financial or business-practice remedies.
- Completion, proceeds, and remaining obligations related to the Non-Arriver businesses held for sale.
- Customer concentration, repurchases and dividends, and debt levels and servicing needs as business conditions evolve.